If I were a bank and I found out a borrower had walked away from a previous loan leaving their creditors holding the bag, there's no way in hell I'd lend them a single cent, ever.
But generally when people talk about "damaged credit", they mean an inability to get a credit card. And there, I'm willing to bet there are plenty of banks willing to do business with people with foreclosures on their records. The revenue model for credit cards is based on fees, not loan risk.
When they took out the mortgage, they were debt-free and had a mortgage equal to the value of their assets (the 1 million dollar house balances out the 1 million dollar loan), giving them a net worth of essentially $0. Now the house is worth $500,000 (but they still owe $1,000,000), so their net worth is essentially -$500,000.
Under these circumstances, it makes sense that the credit card company doesn't want to issue a card to someone that they know is worth negative a half million dollars, even if he did pay all his bills on time and can make the monthly payment on the amount he owes.
The building they are in was built in late 2005 in downtown San Diego. It doesn't take an appraisal to know that it's underwater - there are many short sales and foreclosures of identical units that can attest to that fact. If anything it's easier for the credit card company to see the mortgage balance then it is for them to see someone's income as that does not go on the credit report.
It's the _balance_ on their mortgage (the amount they owe, not the amount of the mortgage originally) - that is the problem.
I've frequently wondered what impact having all my bills sent to Paymybills/Paytrust at Box 14814695, Sioux Falls, South Dakota for the last 10 years has had on my credit profile. :-)
And people are complaining that the crash was caused by under-regulation? How about first removing all the laws which force banks to lend money to folks who are unworthy of credit?
This is actually one thing that I've never been able to make people from countries that have socialized medicine believe.
The sheer _concept_ of an illness wiping you out financially is typically beyond their comprehension. Most people in the United States without that experience also have a tough time understanding it as well.
Suggesting people can never get a reasonable loan because of a bankruptcy, and therefore likely because of an illness, is a little much.
You do maintain a running credit record that should accurately reflect your (illness free) creditworthiness.
(Disclaimer: I'm a Canadian working Silicon Valley with excellent medical insurance who has never had a hospital stay or need to call on said-insurance (knock-on-wood))
Not so fast.
The "study" that supposedly found that actually didn't. At most, it found that folks who went into bankruptcy had medical bills. They also had car payments, house payments or rent payments, and so on.
When you're going broke, bills for everything start piling up.
The general idea of these laws is that 7-10 years is a long-enough window into a persons financial state and habits to determine their current credit-worthiness and limiting this look-back window prevents lenders from subverting the purpose of US bankruptcy laws. There are no laws that force banks to lend money to people, only laws that limit the duration of certain items on your credit record.